Lecture+Note+Chapter+2+with+answers

Lecture+Note+Chapter+2+with+answers - Chapter 2: Conceptual...

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Chapter 2: Conceptual framework underlying financial reporting In-class exercises: EX2-1, P2-1, EX2-3, BE2-11, BE2-10, EX2-6 Practice exercises: EX2-5, P2-2, P2-5, P2-7 1
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1) What is meant by the phrase “conceptual framework” for accounting? Coherent system of objectives & fundamentals that can lead to consistent standards and financial statements Logical foundation for deducing what accounting principles ought to be 1) not bound by existing practice 2) more than generalization of existing principles (descriptive) 3) assumes accounting is rational, scientific, internally consistent, has economic foundation 2
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What is the usefulness of having a conceptual framework for accounting? remove inconsistencies increase comparability reduce uncertainty could reduce need for too specific standards (bright-line) guide for professional judgment give standards external validity (e.g., when auditor is sued) narrows range open to political pressure, potential for abuse basis for addressing new items (can reduce irrational choices) and help in predicting likely standards for new accounting issues that arise in future 3
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Even if the conceptual framework is useful, it will not likely resolve all future accounting problems. Why not? if a fundamental assumption is wrong, may not be apparent until anomalies arise when applied to real world standard setting is political accountants must also consider economic consequences 4
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2) Level 1: Objectives OVERRIDING OBJECTIVE IS TO PROVIDE INFO THAT IS USEFUL IN DECISION- MAKING Decisions about what? Resource allocations and assessing management stewardship Decisions by whom? What is assumed about the sophistication of the users? Have reasonable understanding of accounting and business Study information with diligence What info would be useful for making these decisions? Entity’s econ resources, obligations, equity Changes in these Econ performance How does the IASB differ from the CICA on this? IASB: Objective of financial reporting is to provide information useful for decision making in resource allocations (assumes no additional info beyond this is need to assess management stewardship). 5
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3) Level 2: Qualitative characteristics Accounting information is more useful if it possesses the following characteristics. Define and explain each. 1) UNDERSTANDABILITY Information enables users to see its significance Provides enough information to be clear 2) RELEVANCE Definition: Information will have an impact on user’s decision. Three characteristics that make accounting information relevant a) Predictive Value helps user predict outcome of event/action b) Feedback Value helps user to confirm or correct expectations c) Timeliness available before decision is made 6
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3) RELIABILITY Explain 3 components of reliability: a) Verifiability independent measurers using same method will get same result
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This note was uploaded on 10/13/2010 for the course ACTG 2P31 taught by Professor Pacharn,p during the Fall '10 term at Brock University, Canada.

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Lecture+Note+Chapter+2+with+answers - Chapter 2: Conceptual...

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